This paper tests a version of Barroas tax-smoothing model, which assumes intertemporal optimization by a government seeking to minimize the distortionary costs of taxation, using Pakistan and Sri Lankan data for 1956-95 and 1964-97, respectively. The empirical results indicate that Pakistanas fiscal behavior is consistent with tax smoothing, but not Sri Lankaas. Moreover, fiscal behavior in both countries was dominated by a stagnation of revenues, large tax-tilting-induced deficits, and the consequent accumulation of excessive public liabilities. Analysis of the time-series characteristics of tax-tilting behavior indicates that for both countries the stock of public liabilities is unsustainable under unchanged fiscal policies.I. INTRODUCTION One rationale for the existence of fiscal imbalances is to minimize the distortionary effects of levying nonlump-sum taxes (for a given present value of tax collections), by spreading the burden of these taxes over time.
|Title||:||Spend Now, Pay Later? Tax Smoothing and Fiscal Sustainability in South Asia|
|Author||:||International Monetary Fund|
|Publisher||:||International Monetary Fund - 1999-05-01|